Economic and Legal Aspects of the Implementation of the MARKET STABILITY RESERVE

Economic and Legal Aspects of the  Implementation of the MARKET STABILITY RESERVE

CEEP Member's Position Paper

The Polish Electricity Association, a Central Europe Energy Partners member, is of the opinion that the Market Stability Reserve will have significant economic consequences and faces serious legal question marks.

Economic aspects

  1. Higher carbon prices due to the enforcement of the MSR will drive electricity prices up. High CO2 prices are not necessary to drive low-carbon investment. The carbon price by 2030 in a scenario with the MSR is estimated at 55 EUR/t versus ca. 35 EUR/t without the MSR – over 60% increase. Although the MSR proposal is volume-based, it is clear that its main objective is to increase carbon prices in order to stimulate investment in low-carbon technologies. However, such investments are already taking place today in Europe without high carbon prices. In 2012, there were over 20 GW of renewable capacity installed despite a fairly low carbon price due to support schemes.
  1. Higher energy prices for industry and households. The adoption of the MSR, therefore, will decrease competitiveness of European industry and income for households by increasing electricity prices, without further benefiting low-carbon development, which is taking place anyway through other instruments. This price increase will be most significant in MS with higher carbon intensity of power generation – Poland, Germany, Czech Republic, Bulgaria, Romania, Greece, Estonia.
  1. MSR’s main effect will be an increase of natural gas imports to Europe as it will mainly render gas-fired power plants more profitable than coal-fired installations fuelled mostly by domestic resources. We estimate that this increase by 2030 will be approximately 200 billion cubic meters – equivalent to 2 years of natural gas consumption for power generation across Europe. This effect will significantly decrease Europe’s energy security making it more dependent on imports from often unstable suppliers, which use energy as a political pressure tool.

Legal aspects

  1. MSR is an artificial intervention in a market-based scheme and creates less predictability for market participants.

Insofar as the Market Stability Reserve has the objective and/or result of creating a carbon price floor that is set through the way in which the volume-based system will operate, it is indirectly introducing a carbon tax. As regards indirect taxation, Article 113 TFEU foresees that the Council can only adopt legislation on the harmonization of legislation concerning indirect taxes to the extent that such harmonization is necessary to ensure the functioning of the internal market, and only acting unanimously in accordance with a special legislative procedure after consulting the European Parliament.

  1. It significantly affects the energy mixes of Member States and should be subject to unanimity in accordance with article 192 of the Lisbon Treaty.

While the Treaty on the Functioning of the Union (EU primary law) does provide the EU to adopt environment protection measures, the MSR Decision of the Council and the Parliament will violate the principles of conferral and institutional balance, if they ignore the Article 192 (2)(c) TFEU procedure.

  1. Transferring backloaded allowances to the MSR changes the cap and the 2020 CO2 target.

The back-loading Regulation creates the legitimate expectation for market participants that backloaded EUAs would be re-introduced during 2019 and 2020; and not that they would de facto be removed through introduction of the MSR. It effectively imposes a more stringent EU emissions cap for 2020 by removing 900 million EUAs from the third trading period. This violates the principle of legal certainty since a legitimate expectation was created eight years earlier when the 2020 cap was originally agreed on by the EU institutions.

  1. Early introduction of MSR (prior to 2020) provides lack of transparency, legal stability, and proportionality for market participants.

Early introduction of the Market Stability Reserve (MSR) during trading phase 3 impinges upon the principle of legal certainty since the back loading Regulation constituted an “assurance” on the part of the EU institutions that this change will be final in phase 3.

Lack of transparency, legal stability: In accordance with the adopted decision amending Directive 2003/87/EC (back loading initiative), the legislator assured market participants that administrative intervention to raise the EUA price was a one-off measure during the eight-year period beginning on 1 January 2013. This created an expectation for market participants that further measures impacting price of EUA’s would be implemented only from phase 4 onwards beginning on 1 January 2021, if at all.

Violation of the principle of proportionality: The swift introduction of the MSR during phase 3 and the inclusion of backloaded allowances will have a disproportionally greater impact on Member States that have carbon-intensive energy mixes. This can be viewed as a violation of the principle of proportionality since it goes further than what is necessary to attain the stated objective.